Monday, January 19, 2015

How to Comply with New York Blue Sky Laws?

As I previously explained here, Rule 506 private placements involve the filing of a Form D with the SEC as well as complying with blue sky notice filings requirements in each state where the investors participating in the offering reside.  Rule 506(b) or (c) offerings are exempt from regulation on the state level. According to the National Securities Markets Improvement Act, securities offered under Rule 506 of Regulation D qualify as "covered securities" under Section 18(b)(4) of the Securities Act. Consequently, securities sold under Rule 506 enjoy an exemption from the registration requirements of state-level securities laws (blue sky laws).

But states can (and do) ask the issuers to make notice filings and pay filing fees with respect to Rule 506 private placements if any of the investors are their residents.  In this blog post, I am going to discuss how to do a blue sky filing in New York.

The filing requirement for general securities offerings is set out in Section 359-e of the New York General Business Law. The filing requirement for offerings of real estate securities is set out at Section 352-e of the New York General Business Law. The NY regulator is the Investor Protection Bureau (or Real Estate Finance Bureau) of the State of New York Office of the Attorney General.  

The first thing you need to know about the blue sky filing in New York is that it must be done before any offer or sale is made in the State of New York.  So, what should you send them?
  • Two copies of completed Form 99 (one is manually signed).
  • A copy of the private placement memorandum. 
  • Notice of appearance.
  • Form D.  If it hasn't been filed yet with the SEC, then follow up with the printout of the Form D as filed later.  
  • A copy of the consent to service of process (the original should be sent to the NY Department of State).
  • A check for the blue sky filing fee.
But the notice filing obligation does not end here.  The Department of State, Division of Corporations should receive from the company the original consent to service of process (with a special "backer") and a $35 check.

And that's not all.  The Miscellaneous Records Bureau of the Department of State should receive the original State Notice and Further State Notice and two checks for $75 each (this applies if the issuer is not a NY entity).

A word about fees.

For general securities offerings:
  • $300 for an offering of up to $500,000.
  • $1,200 for an offering of over $500,000.
For offerings of real estate securities:
  • $1,050 for an offering up to $500,000.
  • $1,950 for an offering of over $500,000.
Considering that these filings can be viewed as onerous and expensive, it is not a surprise that some NY attorneys have adopted a position that no blue sky filing or fee is required.  It is certainly supported by the 2002 position paper prepared by the Committee on Securities Regulation of the New York State Bar Association. However, this position paper has not been accepted by the Office of the Attorney General of New York. 

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

The SEC Increases Focus On Digital Currencies

It is clear that the SEC has been focusing on securities fraud involving digital currencies.  In July 2013, the SEC charged Trendon T. Shavers, the founder and operator of Bitcoin Savings and Trust, with defrauding investors in a Ponzi scheme involving Bitcoin.   In June 2014, the SEC charged a Bitcoin-related website owner with publicly offering shares in his venture without first registering them.  I previously wrote about these actions here and here.  On December 8, 2014, the SEC issued a press release announcing yet another enforcement action relating to digital currencies.  This time, it was against Ethan Burnside, a computer programmer who operated two online portals that traded securities using Bitcoin and Litecoin without registering the portals as broker-dealers or stock exchanges.  Mr. Burnside was also sanctioned for conducting unregistered securities offerings.

From August 2012 to October 2013, Mr. Burnside and his company BTC Trading Corp. operated BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange.  These exchanges allowed users to use Bitcoin or Litecoin to buy, sell and trade securities of businesses listed on the exchanges' websites.  The exchanges weren't registered as broker-dealers or stock exchanges.  Separately, Mr. Burnside offered investors opportunities to buy shares of LTC-Global Virtual Stock Exchange and a separate Litecoin mining venture.  A copy of the SEC order is found here.

The current SEC position with respect to Bitcoin and other digital currencies is pretty clear.  As the SEC Chairman Mary Jo White stated in her August 30, 2013 letter, although virtual currency itself may not be a "security" subject to the SEC enforcement, interests that are issued by entities that own or trade virtual currencies are securities, and therefore are subject to the SEC regulation.

Another proof that the SEC has intensified its focus on digital currencies, in addition to more frequent enforcement actions, is the fact that in its December 8th press release, the SEC highlighted the existence of a multi-office Digital Currency Working Group. Although the Group was actually formed in 2013, the SEC has not publicly linked it to any enforcement action until the press release of December 8th.  This Group has approximately 50 members from different SEC divisions and offices.

As Bitcoin and other digital currencies become more prominent in our daily lives, the regulatory focus on digital currencies also increases.  If Bitcoin, Litecoin and other ditigal currencies are here to stay, they need to be regulated, and laws relating to them should be enforced.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Friday, December 26, 2014

Blue Sky Filings Made Easy?

One of the reasons that explains why Rule 506 offerings have been so popular as a means of conducting a private placement is because they are exempt from state regulation.  In 1996, the National Securities Markets Improvement Act stated that securities offered under Rule 506 of Regulation D qualify as "covered securities" under Section 18(b)(4) of the Securities Act.  Consequently, securities sold under Rule 506 enjoy a exemption from the registration requirements of state-level securities laws (blue sky laws).

But states can still ask the issuers to make notice filings and pay filing fees with respect to Rule 506 private placements if any of the investors are their residents.  Most states make it easy for the issuers: they ask for a copy of Form D and a fee that typically ranges around $100-$300.  Some states take it a lot further.  I think New York State blue sky compliance requirements merit a separate blog post (to come).

On December 15, 2014, the North American Securities Administrators Association (NASAA) launched an Electronic Filing Depository system, EFD, that allows issuers to submit Form D and applicable fees to different states at once.  It also allows the public to view blue sky filings made by any issuer in any state that participates in the EFD.  Here is NASAA's training video.  The system provides an electronic receipt as proof of compliance and allows issuers to monitor the progress of states' review of the filing and respond to any deficiencies that may arise.  

Of course, when it comes to blue sky compliance, things cannot be made that simple that fast.  First, not all states participate.  As of now, 41 states and territories participate (New York is not one of them).  Some state regulators want filings to be made only through the EFD, other states accept only hard copies, and yet the third group accepts either.  To confirm what the state regulators expect, attorneys can contact the relevant state regulator using this contact information.  Second, some states may ask for additional documentation (such as consent to service of process or a copy of the offering memorandum) that would need to be sent to them separately.  Third, there is a $150 system use fee for each offering.  The fee covers the issuer's initial Form D filing and all amendment and renewal filings made through the EFD for that offering.

Still, as a lawyer who diligently spends hours (if not days) figuring out each state's blue sky requirements for each private placement I work on, I am thankful for the EFD. Even if it is not perfect, and even if there is a fee to use it, it will save time and will actually increase blue sky compliance.   

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.